Economic Review
as of June 30, 2015
Economic Review
Market Review Global equity markets gained 0.5% during the second quarter, as measured by the MSCI ACWI Index, and outperformed the -1.3% return for the BofA Merill Lynch Global Broad Market Index. 1 Global equities continued to benefit from accommodative central bank policy, but markets declined in June as concerns related to Greece’s debt crisis intensified. Signs of economic progress in Europe contributed to a pullback in bonds, as yields on European government debt rose from historical lows. For the first half of 2015, global equities rose 3.0% while global bonds returned -2.9%. The S&P 500® Index of large cap US stocks returned 0.3% for the quarter, trailing global equities, but posted their 10th straight quarterly gain. Small cap stocks, as measured by the Russell 2000® Index, edged large caps with a 0.4% return on strength in more growth-oriented sectors. Healthcare stocks rose 2.8%, while benefiting from strong earnings, merger activity, and gains from biotechnology companies. Conversely, Utilities returned -5.8% with concerns over elevated valuations and a rise in interest rates. Real estate returned -9.1%, and like other higher income-producing sectors was impacted as bond yields rose. The MSCI EAFE® Index of international developed stocks beat the US market with a 0.8% gain for the quarter. Currency effects boosted returns with the euro appreciating versus the US dollar.2 Japan’s 3.1% return lifted the broader Asian region, as stocks benefited from continued government stimulus.3 Europe was led by UK stocks, while uncertainty related to Greece and the Eurozone weighed on Germany. Emerging markets matched developed markets with a 0.8% return.4 China rose 6.2% for the quarter, even as local sentiment shifted in June, and stocks declined sharply from their highs.5 In fixed income, the Barclays US Aggregate Bond Index returned -1.7% during the quarter and -0.1% for the year. Longer-term bonds suffered larger declines as bond yields rose, with the prospect of the US Federal Reserve (the Fed) raising interest rates in the coming months. Credit spreads widened on corporate bonds, although the high yield sector was more resilient with the rebound in oil prices benefiting energy companies. International government bonds declined as positive economic data in Europe and the U.S. drove global bond yields higher. Emerging market bonds were mixed, with better results seen among US dollar-denominated corporate issues. Economic Highlights US economic activity contracted during the first quarter of 2015 with a GDP reading of -0.2%, down from 4.4% in the fourth quarter of 2014.6 The stronger US dollar weighed on exports, while lower business investment also detracted from economic growth. In addition, the slowdown in the Energy sector and lower oil prices was not matched by a similar pickup in consumer spending. The Federal Reserve of Atlanta forecasts that second-quarter GDP will expand 2.2%, with recent positive data on retail sales and international trade contributing to an improved economic outlook.
1
Index returns from Morningstar Direct Source: MSCI Inc. 3 Ibid 4 Ibid 5 Ibid 6 Source: Bureau of Economic Analysis 2
as of June 30, 2015
Economic Review
The Fed continues to face the difficult question of when to raise interest rates, in view of mixed economic data. While the unemployment rate declined to 5.3% in June, the labor force participation rate declined to its lowest level since 1977. In addition, wage growth remained slow—suggesting limited inflation pressures. The Consumer Price Index (CPI) inflation rate was flat for the 12-month period through May, and core inflation at 1.7% was still below the Fed’s preferred 2.0% level. 7 Uncertainty related to the situation in Greece also adds to the complications of a potential change in Fed policy. Outlook Before the Greek debt crisis took center stage, industry attention was focused on the timing of potential interest rate moves by the Fed. Market expectations of a rate hike continue to get pushed out, with futures prices indicating only a 47.0% chance of a rate increase by year-end.8 The prospect of continued accommodative policy weakened the US dollar during the second quarter, as it depreciated by 2.9% versus the broad basket of international currencies.9 A weakening in the US dollar could help larger US companies remain competitive in overseas markets. US corporate profits are expected to decrease by 4.5% during the second quarter, compared to a year ago, with analysts predicting a 60.0% earnings decline in the energy sector. This compares to 0.8% earnings growth in this year’s first quarter. Healthcare remains a bright spot with earnings expected to grow by 8.2%.10 However, equity valuations remain elevated based on price-to-earnings (P/E) multiples. For example, the forward P/E on the S&P 500® at 16.5 is above its 10-year average of 14.1. The Shiller cyclically adjusted price earnings (CAPE) measure is also above its longer-run average in view of historically low interest rates. 11 Concerns over elevated long-term stock valuations and the prospect of higher interest rates is nothing new and has actually been the case for an extended period of time. This suggests that diversified portfolios should remain grounded with core equity and fixed income market exposures, with diversifying allocations to more flexible strategies. This multifaceted investment approach should continue to provide opportunities within growth and more income-oriented investment solutions.
Please contact us if there have been any changes to your financial situation, your investment objectives, your instructions concerning your account, or to receive an updated Disclosure Brochure.
7
Source: Bureau of Labor Statistics Source: CME Group 9 Source: Bloomberg (US Dollar Index) 10 Source: FactSet 11 Source: Robert Shiller 8
6944 I C30489 I 7/2015
Economic Review
Market Review Global equity markets gained 0.5% during the second quarter, as measured by the MSCI ACWI Index, and outperformed the -1.3% return for the BofA Merill Lynch Global Broad Market Index. 1 Global equities continued to benefit from accommodative central bank policy, but markets declined in June as concerns related to Greece’s debt crisis intensified. Signs of economic progress in Europe contributed to a pullback in bonds, as yields on European government debt rose from historical lows. For the first half of 2015, global equities rose 3.0% while global bonds returned -2.9%. The S&P 500® Index of large cap US stocks returned 0.3% for the quarter, trailing global equities, but posted their 10th straight quarterly gain. Small cap stocks, as measured by the Russell 2000® Index, edged large caps with a 0.4% return on strength in more growth-oriented sectors. Healthcare stocks rose 2.8%, while benefiting from strong earnings, merger activity, and gains from biotechnology companies. Conversely, Utilities returned -5.8% with concerns over elevated valuations and a rise in interest rates. Real estate returned -9.1%, and like other higher income-producing sectors was impacted as bond yields rose. The MSCI EAFE® Index of international developed stocks beat the US market with a 0.8% gain for the quarter. Currency effects boosted returns with the euro appreciating versus the US dollar.2 Japan’s 3.1% return lifted the broader Asian region, as stocks benefited from continued government stimulus.3 Europe was led by UK stocks, while uncertainty related to Greece and the Eurozone weighed on Germany. Emerging markets matched developed markets with a 0.8% return.4 China rose 6.2% for the quarter, even as local sentiment shifted in June, and stocks declined sharply from their highs.5 In fixed income, the Barclays US Aggregate Bond Index returned -1.7% during the quarter and -0.1% for the year. Longer-term bonds suffered larger declines as bond yields rose, with the prospect of the US Federal Reserve (the Fed) raising interest rates in the coming months. Credit spreads widened on corporate bonds, although the high yield sector was more resilient with the rebound in oil prices benefiting energy companies. International government bonds declined as positive economic data in Europe and the U.S. drove global bond yields higher. Emerging market bonds were mixed, with better results seen among US dollar-denominated corporate issues. Economic Highlights US economic activity contracted during the first quarter of 2015 with a GDP reading of -0.2%, down from 4.4% in the fourth quarter of 2014.6 The stronger US dollar weighed on exports, while lower business investment also detracted from economic growth. In addition, the slowdown in the Energy sector and lower oil prices was not matched by a similar pickup in consumer spending. The Federal Reserve of Atlanta forecasts that second-quarter GDP will expand 2.2%, with recent positive data on retail sales and international trade contributing to an improved economic outlook.
1
Index returns from Morningstar Direct Source: MSCI Inc. 3 Ibid 4 Ibid 5 Ibid 6 Source: Bureau of Economic Analysis 2
as of June 30, 2015
Economic Review
The Fed continues to face the difficult question of when to raise interest rates, in view of mixed economic data. While the unemployment rate declined to 5.3% in June, the labor force participation rate declined to its lowest level since 1977. In addition, wage growth remained slow—suggesting limited inflation pressures. The Consumer Price Index (CPI) inflation rate was flat for the 12-month period through May, and core inflation at 1.7% was still below the Fed’s preferred 2.0% level. 7 Uncertainty related to the situation in Greece also adds to the complications of a potential change in Fed policy. Outlook Before the Greek debt crisis took center stage, industry attention was focused on the timing of potential interest rate moves by the Fed. Market expectations of a rate hike continue to get pushed out, with futures prices indicating only a 47.0% chance of a rate increase by year-end.8 The prospect of continued accommodative policy weakened the US dollar during the second quarter, as it depreciated by 2.9% versus the broad basket of international currencies.9 A weakening in the US dollar could help larger US companies remain competitive in overseas markets. US corporate profits are expected to decrease by 4.5% during the second quarter, compared to a year ago, with analysts predicting a 60.0% earnings decline in the energy sector. This compares to 0.8% earnings growth in this year’s first quarter. Healthcare remains a bright spot with earnings expected to grow by 8.2%.10 However, equity valuations remain elevated based on price-to-earnings (P/E) multiples. For example, the forward P/E on the S&P 500® at 16.5 is above its 10-year average of 14.1. The Shiller cyclically adjusted price earnings (CAPE) measure is also above its longer-run average in view of historically low interest rates. 11 Concerns over elevated long-term stock valuations and the prospect of higher interest rates is nothing new and has actually been the case for an extended period of time. This suggests that diversified portfolios should remain grounded with core equity and fixed income market exposures, with diversifying allocations to more flexible strategies. This multifaceted investment approach should continue to provide opportunities within growth and more income-oriented investment solutions.
Please contact us if there have been any changes to your financial situation, your investment objectives, your instructions concerning your account, or to receive an updated Disclosure Brochure.
7
Source: Bureau of Labor Statistics Source: CME Group 9 Source: Bloomberg (US Dollar Index) 10 Source: FactSet 11 Source: Robert Shiller 8
6944 I C30489 I 7/2015
